The whole truth about copying trades

The second step for successful investing is to make a preliminary selection of traders.

There are quite a lot of copying signals and PAMM accounts and hundreds of traders on these services, that is why we need to specify several criteria, by which we need to make a strict selection of the best traders.

Criteria for fast trader selection:

·         Statement. The service should provide a possibility to download the trader’s statement and analyse it in Excel. Since not all indicators may be provided by the service, you would have to calculate something.

To conduct analysis, you should take traders with the trading history not less than 1 year, so that a trader could have shown his efficiency in various market phases.

·          Capital curve should be systematically growing, fractal, which means that various capital curve areas should be similar, which shows that the trader’s system hasn’t been changed during the trading period.

·         Drawdown shouldn’t be more than 30%, since it is difficult and psychologically hard for an investor to exit from a big drawdown. This also shows that a trader trades rather conservatively.

·         Profit factor is an amount of all positive trades with respect to the amount of all negative trades and it should be more than 2. It shows that the system makes money in a stable fashion and the profit exceeds losses more than twice.

·         Average trade gain should be more than the average trade loss. It shows that a trader possesses the so-called ‘alpha’, in other words, correct market entry and exit points and makes money with the help of correct analytics rather than capital management.

·         Sharpe ratio assesses the trading system risk and reward relation and, consequently, it is necessary to include those traders in the portfolio who have the highest values of this ratio.

·         Capital loading will help you to assess how much a trader uses aggressive capital management methods. The portfolio should include traders with a minimum capital loading, since such traders would trade in a more stable fashion and they would have a larger margin of safety in the event of market turbulences.

·         Mathematical expectation of profit should be more than 3 points, so that the system could have been scaled for different accounts and different brokers. The higher mathematical expectation in points, the better and more profitable the trading system is.

Maximum 50 best traders could be selected out of 500 traders with profitable statements on the basis of such an analysis. And then you should continue their deeper analysis.

The third step in the profitable portfolio formation is a deeper trading analysis of those traders whom we selected.

Criteria of a deeper analysis:

·         Mathematical and statistical analysis of trades. This stage requires loading the trader’s statement into Excel and calculating additional characteristics by statement. Some characteristics could be taken from services, if they are calculated by them.

The goal is to find stable traders. The following will help us to do that:

• % of profitable trades;
• average trade time;
• standard deviation in points;
• mathematical expectation in dollars, etc.

It is necessary to describe and digitize the trading system with the help of the instruments of statistical analysis and include the traders with the best statistics into the portfolio.

·         Description of the trading system. It is necessary to put several dozens of trades in the chart and describe the trader’s trading system logic and your trading experience would be very valuable here. It is required for the further trader action control and understanding by means of what a trader makes money in the market. It is preferable to include those traders into the portfolio, who have different trading approaches for larger diversification.

·         Capital management system description. It might be clear from the statement analysis whether a trader uses aggressive capital management methods – martingale, averaging, waiting out the losses, etc.

Example of a trader who uses martingale – there are specific ‘teeth’ in the capital curve due to high volume trading. You should avoid copying traders who use aggressive methods of capital management.

·         Description of the risk management system. It might be clear from the statement analysis whether a trader uses stop losses, limits risks for a series of trades, day, week, month and maximum drawdown. The portfolio should include traders with a strict limitation of risks who do not allow losing the whole profit during one unlucky trading day.

A separate file with statement, statistics and description could be arranged for each trader based on the results of such an analysis. And only not more than 5 the most conservative and safe traders out of the best 50 may get into the portfolio.

After you formed your portfolio out of traders, it is necessary to start working with them, however, by a certain algorithm. Full-fledged launching from the start could bring losses.

Algorithm of putting traders into operation:

·         Demo portfolio. After you select traders, you can make a demo investing into them in an Excel file. You should note down the current indicators and refresh information once a week / month. Having monitored the portfolio during 3 months, you would be able to assess the efficiency of your investments without losing a single dollar.

·         Minimum volume. If the demo mode showed positive results, you could start investing real money in traders, however, you should start with minimum possible amounts. You should do it for 3 months to make sure, using little but real money, that your portfolio is efficient.

·         Working volume. Then you can increase trading volumes of each trader once a month, reaching step-by-step the working volume of your portfolio. Capital shares, assigned to each trader, should be specified by the maximum drawdown, which a trader may tolerate in the worst situation.

You should carry out trading control once a month after your portfolio entered the working mode. The goal of this control is to see that some ‘unhealthy process’ is going on with a trader and to exclude him from the portfolio before he makes losses. So, once a month you should analyse and control:

·       mathematical and statistical indicators, which you calculated and analysed at the selection stage. If the trader’s statistics deteriorates, you should reduce his working volume or completely exclude him from the portfolio;

·        algorithm of the trading system, the pattern of entry and exit points shouldn’t change and the system should stay stable;

·        capital management and risk management should also stay within the previous trades, otherwise the complete trader’s previous statistics ceases to be representative.

You may do portfolio rebalancing after carrying out this analysis:

•         reduce volume for traders with deteriorating indicators;
•         clear the portfolio of those traders who changed the trading system or make constant losses;

·         supplement the portfolio with those traders who passed the demo portfolio.

Risk management is the main thing in the investing process. That is why it is necessary to use software in order to strictly control risks and remove traders from the portfolio if they exceed risks.

Basic risk management principles of the traders’ portfolio:

• Maximum drawdown of one system is not more than 30%;
• Exit from one system drawdown is not more than 6 months;
• The portfolio capital risk of one system is not more than 5% with 5 traders in the portfolio;
• Maximum risk for the whole portfolio capital is not more than 30%.

Such an approach would allow preservation of a big part of invested funds even if all traders simultaneously make losses.

You may look at the trader copying service from the other side. You could try to become a profitable trader, attract capital and get payment/percent for trading signals by yourself. This variant is not simple either but, if you select the correct way, you can make it much shorter.

Analysis of trading volumes from regulated exchanges, for example, CME (Chicago Mercantile Exchange) would help you to understand actions of major market participants better and trade in the trend direction. Such an approach could significantly increase efficiency of even simple trading systems.

The trading ATAS platform contains many useful volume analysis indicators, which would help you to analyse volumes and actions of major market participants.

For example, the Cluster Search indicator:

This indicator is depicted as pink rectangles in the chart. It shows big ‘inflows’ of volume into the market, which often correspond with important market reversal points. This understanding can help a trader to create a correct trading strategy.

It is not easy to make money using the services of copying trades or investing in PAMM accounts. To do it you need knowledge, experience and time. These services are not for beginners. However, if you want to become a portfolio manager and manage your own portfolio consisting of profitable traders, then:

• Invest only in a portfolio since it is not sufficient for a stable operation to copy only one trader;
• Conduct analysis of hundreds of traders on the monthly basis, looking for talents;
• Deeply analyse trading systems and capital and risk management of your traders;
• Start working with new traders slowly through the demo portfolio;
• Analyse traders and rebalance your portfolio on the monthly basis, removing weak ones and adding strong ones;
• Strictly control your risks using software.

At the same time, move along the second way, becoming a profitable trader who sells his own trades and attracting investment capital using the trading ATAS platform, which will become your right hand in it.